Walter Energy and Vale Are Digging Out

NEW YORK (TheStreet) -- I scan the markets every day searching for overbought and oversold stocks that are worth examining closer. In a market that is near all-time highs, finding beat-up stocks is surprisingly easy. The real trick is to separate dead-cat bounces from potential winners.

Dead cats can quickly smell up a portfolio, so before we make a move we want to have as much working for us as we can. Insider buying, improving earnings, technical indicators and other metrics can take the emotion out of investing and provide the courage to push the button while others are throwing in the white towel.

I like the following for a holding time of about six months and a profit target gain of about 30%. Never lose sight of the fact that there's a reason why investors walked away and be ready to do the same if they don't work out.

VALE Revenue Quarterly Chart VALE Revenue Quarterly data by YCharts

Vale S.A. ( VALE)

Background: Vale engages in the research, production, and marketing of iron ore and pellets, nickel, fertilizers, copper, coal, manganese, ferroalloys, cobalt, platinum group metals and precious metals in Brazil and internationally.

52-Week Range: $12.39 to $21.88

I'm not surprised Vale made the list after the equity meltdown in Brazil and recent fall in mining around the world. The good news is that we're working off a low base and the returning of sobriety to the over-hyped Brazilian markets. Gold has markedly moved off the June lows. As long as United States Oil and Gas ( USO) refuses to fall, inflation is a real concern, and that includes iron ore.

An improving Asian economy, particularly China, should provide the catalyst for digging Vale out of the hole. As a result of lower commodity prices, Vale decreased the size of dividend payments. Vale distributes an annualized dividend of 76 cents, yielding over 4.5%. Vale is somewhat unique in that it pays dividends twice a year instead of the usual four. The next dividend payment is coming up on Oct. 31.

The short interest is slightly elevated at 3.1%, albeit, not yet enough to make me want to worry about it. As long as it stays under 4%, I won't give it much thought. Look for an entry price near $15.20 as a good buy.

VALE Payout Ratio TTM Chart VALE Payout Ratio TTM data by YCharts

WLT Revenue Quarterly Chart WLT Revenue Quarterly data by YCharts

Walter Energy ( WLT)

Background: Walter Energy produces and exports metallurgical coal for the steel industry primarily in the United States. The company also produces thermal and industrial coal, anthracite, metallurgical coke, coal bed methane gas, and other related products. It principally serves electric utility and industrial customers.

52-Week Range: $9.88 to $41.32

Coal has truly been a four-letter word during the current administration. The thing about politics is that the pendulum swings both ways and has a tendency to revert to the mean if averaged over enough time.

Based on insider buying, the C-suite and directors believe the pendulum will start reverting soon. Within the last six months, insiders have reportedly bought over 116,000 shares, and no one has sold. I don't fully subscribe to the concept that insiders sell for many reasons, but I do believe they buy for only one reason, namely to make money.

Insider buying alone isn't enough to get me excited about a stock, though. After all, their business card doesn't say "market timer" on it. But all else being equal, insiders have the best vantage point of anyone. Another reason to discount insider buying sometimes is because companies can offer incentives for reporting insiders to make purchases.

What I do like about the chart is the quick recovery after the dividend was cut. The share price gapped lower and continued to fall, but quickly bounced after testing the $10 price support area.

TheStreet's Bret Kenwell wrote a "Fast Money" recap with Tim Seymour stating Walter Energy is making a breakout move. I concur, but I will add that if you keep the powder dry and sit on your hands for a few days, you should be able to add this one for under $13.

Along with cutting the dividend, which is already priced in, the company is targeting a small amount of asset sales to shore up the balance sheet. In this environment, it makes sense for Vale to keep all options available. In the same way, Vale's fortunes are tied to world commodity prices so is Walter Energy's. As the world economy improves, demand from Asia (again think China) should increase, lifting world coal prices, even if United States demand remains tepid.

The level of short interest is where Walter Energy truly becomes compelling. The short interest is altitudinous at 46.6%. There is no doubt short-sellers believe this miner's shares will dig deeper. Keep in mind that short sellers don't always get it right. Another company that had just as much short interest was Tesla ( TSLA) just a few short months ago.

Tesla's price chart shows what can happen when too many short-sellers pile on the train and a stock becomes an overnight sensation. Walter Energy probably won't experience such a rapid rise, but it is possible.

WLT Payout Ratio TTM Chart WLT Payout Ratio TTM data by YCharts

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Robert Weinstein is an active trader focusing on the psychological importance of risk mitigation, emotion and financial behavior of market participants. Robert co-founded the investing blog StockSaints, where he writes a journal about his trading activity and experiences.

In addition to TheStreet, Robert also contributes to Real Money Pro, providing real-time trading ideas for stocks, options and futures.

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